Global Courant
While local inflation is still above the upper limit of the South African Reserve Bank’s (SARB) target range of 3% to 6%, economists expect it to begin to decline as rising interest rates take effect.
Adriaan Pask, the CIO at PSG Wealth, said the country’s inflation level should reach the target range in the second half of this year, and current data supports this expectation.
On Wednesday (June 21), StatsSA reported that inflation in May fell to its lowest level in 13 months, at 6.3% year on year.
This decline was attributed to smaller increases in food and fuel prices. The 6.8% drop from the previous month exceeded expectations.
Consumer inflation in South Africa was reported at 0.2% – lower than the expected rate of 0.4% predicted by analysts.
In addition, core inflation, which excludes food, non-alcoholic beverage, fuel and energy prices, was 5.2% year on year in May, slightly lower than 5.3% in the previous month.
The softer – but still impactful – inflationary pressure for consumers is cost-push inflation, said Professor Daniel Meyer, an economics specialist at the University of Johannesburg.
“Cost-push inflation occurs when the general price level rises due to an increase in the cost of production in the private sector. Businesses are primarily focused on making a profit; so as the cost of production rises, so does the price of goods and services.”
“Cost-push inflation is therefore driven up by factors of production and input costs, including increases in energy costs (load shedding has a huge impact on production costs); government taxes and policy uncertainty; municipal charges related to rates and taxes; supply chain processes and logistics; and an increase in wages,” he said.
This comes after the SARB has raised rates 10 times since the start of the interest rate cycle in November 2021 – a total of 475 basis points.
The next rate decision is scheduled for July.
Investec chief economist Annabel Bishop says a 25 basis point hike is priced in for the end of the year; however, she thinks it’s unlikely at the moment.
The economist added that South Africa may have reached its final interest rate in the current cycle.
Taking into account the Forward Rate Agreement curve (a contract that sets the rate of interest to be paid in the future), Bishop said it also indicated the likelihood of a 25 basis point reduction in the repo rate by the end of next year. if not until 2025.
“But this is more likely to happen to prevent South Africa’s monetary policy from becoming restrictive as inflation falls towards 4.5% on an annual basis,” she said.
As reported by Reuters, Jason Tuvey, an economist at Capital Economics, reiterated the view that the central bank’s tightening cycle was over and that interest rates would be held at 8.25% next month.
Casey Delport, an investment analyst at Anchor Capital, also said inflation had begun to show signs of abating, but risks associated with the country’s energy crisis remained.
Read: Recession warning for South Africa in 2023
